The Online Library of Liberty

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• Banking In Germany.
• Chapter I.: Non-issuing Credit Institutions.
• Chapter II.: German Banks of Issue.
• History of Banking In Austria-hungary.
• Chapter I.: The Austrian National Bank.
• Chapter II.: Austrian Joint-stock Banks and Banking Associations.
• Chapter III.: Hungarian Joint-stock Banks and Private Credit Institutions.
• Appendix to Banking In Germany and Austria-hungary.
• II.: Statistics of Banking In Austria-hungary.
• Banking In the Netherlands.
• Introduction.
• Chapter I.: Era of Exchange Banks.
• Chapter II.: Period From 1814. Modern Dutch Banking.
• Chapter III.: Period 1814-1863. the Netherlands Bank.
• Chapter IV.: The Netherlands Bank, 1864 to 1895.
• Chapter V.: Banks of Issue In the Dutch Colonies.
• Chapter VI.: “cashiers,” Joint-stock Banks, and Private Bankers.
• Banking In the Scandinavian Nations.
• Part I.: Banking In Denmark.
• Chapter I.: History Previous to the National Bank.
• Chapter II.: The National Bank During the First Half of the Nineteenth Century.
• Chapter III.: Private Banks.
• Part II.: Banking In Sweden.
• Part III.: Banking In Norway.
• Banking and Money In Japan.
• Part I.: The Banking System.
• Chapter I.: Common Banks.
• Chapter II.: The National Banks.
• Chapter III.: The Yokohama Specie Bank. ( Shiokinginko. )
• Chapter IV.: The Bank of Japan. ( Nippon Ginko )
• Chapter V.: Land Mortgage Banks.
• Part II.: The Currency of Japan.
• Chapter I.: The Old Coinage System.
• Chapter II.: The New Coinage Period.
• Chapter III.: The Paper Currency.
• Chapter IV.: Readjustment of the Public Debt.
• Chapter V.: The Future Money Standard.
• Appendices.
• Appendix D.: National Debt In Japan. (from the “british Economic Association Journal” of June, 1895.)
• Banking, Currency and Land Tenure In the Chinese Empire.
• I.: China’s Currencies.
• II.: Chinese Banking: Ancient and Modern.
• III.: Land Tenure and Taxation In China.

CHAPTER V.

LAND MORTGAGE BANKS.

ANCIENT MORTGAGE LAWS.

IN ancient days the land was distributed among the cultivators by the State. It was not to be mortgaged or alienated. But by and by, as private ownership was recognized, the land was mortgaged to a large extent. The heavily indebted people lost the ownership by default, and became pauperized, some almost enslaved. In order to remedy this state of things, a law to prohibit land mortgages was promulgated in 751 ad Evasion of the law was, however, very common, and in 783 ad it was enacted that the offender should be severely punished. But the law proved inoperative, and by the time of Kamakura Shiogunate, in the twelfth century, the system of land mortgage prevailed to an enormous extent and was the occasion of frequent lawsuits. The term was usually twenty years within which the debt was to be paid off. By the time of Ashikaga Shiogunate, in the fourteenth century, if the interest reached to the same amount as the principal, the land was to be returned to the mortgagor. The Tokugawa Shiogunate undertook to prevent the aggregation of land ownership in the hands of the few after it assumed power in 1614 ad It prohibited the permanent alienation of land, allowing only its sale for a certain number of years, except in case of newly reclaimed lands and those belonging to people with no fixed domicile. Mortgage and pledging were allowed when the term was fixed and the location defined, and permission was given signed by the head man of the village. If ten years elapsed after the expiration of the term, the ownership was transferred to the mortgagee, such land being termed “liquidated land.” Penalties were inflicted on those who mortgaged the same land to more than one creditor at the same time. Days of grace for the payment were thus fixed: if below five yen or five koku of rice, at thirty days; if below ten yen or ten koku,* at sixty days; if above ten yen or ten koku, at one hundred days; if between fifty yen or koku and one hundred yen or koku, two hundred and fifty days; if above one hundred yen or koku, ten months; if above two hundred yen or koku, thirteen months.

The mortgagor and mortgagee of land belonging to monasteries or temples were punished by banishment. The many were, however, at the mercy of crafty people, and the land was gradually “swallowed up” by a limited moneyed class. In order to make it clear how such a result was brought about, we must describe briefly the financial and social condition of Japan in those days. The peace which lasted for more than two centuries under the Tokugawa Shiogunate caused a rapid increase of population. But free migration and freedom of choice of a vocation were restrained by the iron rule of feudalism. Paper notes were over-issued by each Daimio, coins were debased, and the poor suffered while the well-to-do people became richer and richer. Daimios and their retainers passed their days in profligacy and luxury. Their finances became straitened and the necessity for heavy taxes grew apace. The only source of taxation was the land. So the cultivators of the soil had to bear the burden, which was in some cases above fifty per cent. of their income. Their lot was indeed a sad one, working night and day all through the year, but with nothing left after all except barely enough to support life. Bad harvests, floods, locusts, and other calamities increased the prevalent misery. Taxes had frequently to be paid from the proceeds of a loan, raised by mortgaging the land. So the land mortgages became general, and the debtors being unable to pay back because nothing remained to them except daily subsistence, the land fell inevitably into the hands of the creditors regardless of State interference and restrictions.

THE FIRST LAND CREDIT ASSOCIATION.

So many Daimios were in need of money and their subjects were in so wretched a condition, that to fill the coffers of Daimios and to lighten the burden of the tillers of the soil were the sole aims of administrators, financiers, and economists. Among them, Ninomiya Sontoku must be counted foremost. His system was to urge retrenchment, do away with luxury, and save from the annual revenue a portion to be devoted to productive purposes, thus increasing the income of the Daimios and at the same time making a sure and enlarged foundation for the income of the people. His principles were adopted by the Daimios and by the people of many districts, and they resulted in the formation of something like credit associations, called Hotokusha, in the provinces of Suruga, Totomi, Sagami, Idzu, Mikawa, Ise, and Iwashiro. The aim of the associations was to help distressed farmers, to give facilities for the cultivation of waste lands, for irrigation, for the plantation of forest lands, for the construction and repair of roads, dikes, canals, and aqueducts. They received deposits, which were lent at the rate of five per cent. and for the term of six years. The debtor had to place in the hands of the association securities or a document indorsed by two persons at least. The loans were to be paid back in installments extending over ten years from the outset. Controlling the small associations there was a central one doing a larger business and giving aid in money to the smaller ones. Many had branches, to which they also gave pecuniary assistance. The whole system, which still exists, is governed by the principles of frugality, charity, social purity, obedience to the law and the sovereign, and the use of money for productive purposes; no interest except so-called thanks-offering money, which sometimes amounts to fifteen per cent., being demanded, and the officers receiving no salary for their services. Beneficial as these associations are, they are not widely spread over the country, and their working capital is very small. Consequently, agriculturists in general resort to rich lenders or ordinary banks for needed capital. This recourse was made easier by the abolition, in 1872, of the legal prohibition of the sale and purchase of land.

A MORTGAGE LAW ENACTED IN 1873, FOLLOWED BY MORTGAGE BANKS.

In 1873, a law defining the mortgage and pledge was enacted, the former being the case in which the debtor places his land in the hands of the creditor, who, by letting it out, reaps the income and pays the taxes; while in the latter case the bond only is handed over, and the land is retained and cultivated by the debtor. The term was limited to three years, and pledging or mortgaging to foreigners was strictly prohibited. Gradually many banks were established, and commerce and industry being not yet fully developed, they made loans on land mortgages. Facilities for borrowing being increased, and the standard of living being at the same time suddenly raised, the debt borne by the land grew in volume. But as the rate of profit of the land cultivators is less than seven per cent., as shown below, while the market rate for loans ranges above ten per cent., and as the return on the invested capital is very slow, the lender could not secure payment as promised, and the debtor failed even to pay interest.

COMPARISON OF BORROWERS BY OCCUPATIONS.

Taking the actual state of things, we find that in national and common banks the agricultural class, though borrowers for small amounts, far outnumber other classes, as will appear from the following table of occupations:

Even if we divide the loans into the various kinds of securities pledged, we find the land plays an important part, as will be seen by the following table:

As a necessary consequence, a great deal of the money advanced by banks in the form of loans is of long date, and often becomes irrecoverable, as shown below:

The agricultural population is also in a majority in installment loans.

In the sales of forfeited pledges and securities, farm lands far outnumber any other class of property.

These tables demonstrate the fact that the high rate of interest exacted for loans on land by banks is a matter of necessity. The average bank rate is 12.6 per cent., but still higher rates, such as 36 per cent., are demanded by the companies and individuals, who, numbering 30,840, with 53,788,553 yen capital, lend on landed security to the amount of 53,655,033 yen. It is thus clear that both the creditor and the debtor suffered, and land is losing favor as the basis of loans among banks, especially since trade and industry developed. For instance, when we compare 1894 with 1890, the proportion of loans on land to the total amount advanced by national banks has thus decreased:

When we look into the registered amount of pledges and mortgages of real property, and observe how the number of transactions is largest in small loans, we can readily understand that the burdens of the land-holders, and especially of small land-holders, are extremely heavy.

The intensity of the small land-owner’s attachment to his land is something hard to conceive. Many would rather die than part with the land handed down from their ancestors. But there is no help for it; the land must be sold or its ownership transferred to the creditor when loans fall in default. The decreased number of tax-payers may be cited as one of the proofs of the gradual decay of the yeomanry of Japan, the tax being paid by the owner of the land.

AGRICULTURAL CREDIT INSTITUTIONS AS A SOLUTION OF JAPAN’S LAND TENURE SYSTEM.

The last table shows the gradual decrease of small land-owners in spite of the increase of population. Thus the land is passing gradually into fewer hands, and the owner and tiller of the soil are separated, decreasing the number of land-owners and increasing tenants and mere wage-earners. The rural population are migrating to cities, but as industry is not yet sufficiently developed to absorb these people, they have to suffer. Even if they are able to obtain employment in factories, they have in bad times nothing to fall back upon. This is a serious question that may plunge the country into the whirlpool of social agitation, with which European countries are perplexed, but of which Japan knew nothing till the coming of the great change in her economic condition.

What, then, should be done? The condition of agriculturists cannot be disregarded, because they are the principal tax-payers and form a majority of the total population. The most obvious remedial measures consist in establishing agricultural banks and a crédit foncier system which may relieve the land-owners by lending them money at long terms and at a reduced rate of interest, and may also at the same time release the inactive funds of the commercial banks. This view is adopted by the Government, and it seems to be shared by thoughtful men and by members of the Diet. Though it is difficult to foretell how things will turn out, it is certain that the Government bills on crédit foncier and agricultural and industrial banks presented to the Diet on January 16, 1896, will be seriously treated, because the House has referred the subject to a select committee of twenty-seven members.

SUGGESTED SCHEME FOR LAND BANKS.

It is proposed to make the crédit foncier the central agency for the agricultural and industrial banks to be established in each prefecture. The former will be a joint-stock bank of 10,000,000 yen capital, with a term of existence of 100 years, both capital and term being subject to increase at the will of the shareholders. Directors will be appointed or selected by the Government from among those holding stock. The main business will be limited to lending money to be used for agricultural or industrial purposes, with land or houses as security, except in the case of local public corporations, for a term of not over fifty years, repayable in installments. Besides, one-tenth of the above-named sum may be advanced on ordinary loans of not more than five years’ term, with land, houses, or national and local debt bonds as security. The bank can also take charge of bullion or negotiable paper and can buy the debt certificates issued by commercial banks, thus giving aid to them in an indirect yet efficient way. In order to let the bank make a moderate profit, even by lending at a low rate, say two per cent. lower than the market rate, the special privilege is granted of issuing debt certificates to tenfold instead of the customary limit of twice the amount of its paid-up capital. These certificates must be paid back as the payments by installment are received, and they are protected against forgery in the same way as the currency of the realm. During the first ten years, the State will furnish a sufficient sum to let the shareholders get at least five per cent. on their investment. In return for these special concessions, the bank will have to accumulate one-tenth of its annual profit as a reserve, and must get permission from the Government for any change in its by-laws, for the opening of branches or agencies, the payment of dividends, issuing of certificates, etc. Besides, the Government retains the power to appoint the first organizing committee of the bank, as also comptrollers to oversee its management. The Government will also have power to restrain any act of the bank which it deems contrary to law, regulations, or public policy; to fix how much is to be advanced for loans, as well as the rate of interest. Being a great central institution, the bank may be able to benefit local corporations and agricultural and industrial undertakings on a large scale, but the small farmers and producers in the country may not be able to utilize its advantages.

THE SPECIAL FUNCTIONS OF AGRICULTURAL BANKS.

The agricultural bank is intended to supply their special want. It will be a joint-stock company, with a much smaller capital, say between 200,000 and 1,000,000 yen, with one prefecture as its sphere of action, and its shareholders restricted to the corporations of individual residents of the district. This localization is a matter of necessity, so that the bank management may know the circumstances of debtors. These can borrow only for productive purposes, such as reclamation of waste land, irrigation, improvement of the soil, construction of farm-roads, dikes and aqueducts, or farm-houses, planting of forests, purchase of seeds, manures, silk-worm cocoons and other raw materials, machines, implements, and cattle; in fact, any species of agricultural or industrial improvement. If not used in the way stipulated for, the money will be redemanded at once. The debtor can borrow on lands or houses as security, and pay back in installments extending over not more than thirty years. Even those who have no property at all, such as tenants and mechanics, can borrow from the bank for a term of not over five years, if they form a body of not less than twenty persons with common unlimited liability. Hence credit associations or unions for industrial undertakings can borrow without any pledge, and the activity of such bodies as the Hotokusha will thus be greatly increased. Besides, the bank can discount bills drawn by producers, and can lend on the product as security, it can receive deposits, take care of bullion or negotiable paper, and may become an agency of the crédit foncier. The privilege of issue of debt certificates is fixed at fivefold of the paid-up capital, and the bank is entitled to a subsidy for ten years after its creation. Its responsibilities and the nature of the Government control are almost the same as in the case of the crédit foncier, except that the work of the comptroller is performed by local officers under the orders of the Minister of Finance. These two kinds of banks are linked together, the local ones being dependent on the help of the central organization, while the latter must make use of the former in the lending and collection of its funds. When these two are established, the land-owners will be supplied with cheaper capital, lent for a term long enough to suit their needs, and at a rate of interest probably half of the present average rate of fifteen per cent. Moreover, the commercial banks will be relieved of their agricultural credits, and thereby their tied-up capital will be freed, thus lowering the general rate of interest. Even granting some failures to be inevitable, these institutions must be organized if the small owners of land and the pursuit of industry on a small scale are to be kept up. Just now, peace, contentment, and happiness pervade the country, on account of the subdivision of land among small owners, and because the chief branches of industry, such as tea culture and silk and porcelain making, are done mostly at home as the by-work of agriculture. Small proprietorship and home industry may be gradually supplanted by landlordism and the factory system, but it is extremely desirable that the decline of the former should, if possible, be retarded. Moreover, it is part of the responsibility of the State to protect existing conditions and interests so long as they are not useless or pernicious. This is why the establishment of the crédit foncier was predicted by Count Matsukata when he introduced the scheme of the central bank in 1882. Many shared his views, but the execution of the plan has been delayed till the present time, for the following reasons:

1. The failures of land mortgage banks abroad obliged even their supporters to hesitate. 2. The continuance of good harvests and the consequent well-being of the agricultural population lessened the urgency of the scheme. 3. The attention of legislators was occupied with the establishment of the Bank of Japan, the closing up of the national banks, etc. 4. Caution and circumspection demanded a careful investigation of practical examples in Western countries before the preparation of laws and regulations.

But now public opinion seems to be eager for practical legislation, which, however, may not be had without opposition. The conservative element will be against it because of its novelty, and pessimists will oppose it as a dangerous undertaking. There are, moreover, powerful opponents who insist that it may end in a way totally different from that intended, the benefit being reaped by large land and factory owners, while if the funds be lent to small proprietors, it may lead to profligacy and waste. This last is a consideration to be dealt with thoughtfully. Indeed, the question is not whether the land banks are necessary or not, but how their working may be made beneficial. It seems to be the intention of the Government to attain this difficult end by keeping a firm control over these banks. This, perhaps, may be the only effective means in such a country as Japan, where the administration is comparatively free from corruption and abuse.

With the establishment of the Government control, the necessity of subsidizing them arises. As said before, the central bank is guaranteed five per cent. interest for ten years. But the guarantee system is too complex to be applied to scores of local banks; therefore, quite a different method is employed with them. A sum of about 10,000,000 yen is set aside from the national exchequer. This is divided out to each prefecture in proportion to the area of mortgageable land. With this fund, the prefecture becomes the shareholder of the agricultural bank of the district. For ten years from the time of its establishment, the bank is relieved of any obligation to pay annual dividends on these shares, and during that term the prefecture must hold the shares. But after that it can divide them among local corporations of the district, who must make them part of their capital. As the actual work of controlling the local bank is intrusted to the prefecture, the possession of an interest in the working of the bank will induce greater care in the discharge of this function. For ten years the bank will be able to increase the profit and the dividends to be paid to ordinary shareholders. The State will thus give help to the banks without meddling with their business. So everybody is satisfied, and many good purposes fulfilled at the same time. So far as the law is concerned, the plan is nearly complete. The next and the most important question is how to make the practical working of these banks advantageous. The answer to this must depend upon whether the right men are put in the right places, and we fully expect that the result will be satisfactory to the country and to the people for whose relief these institutions have been devised.

PART II.

THE CURRENCY OF JAPAN.

[* ] 1.9534 koku is nearly equal to an American bushel.